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Sort through the wealth of information on the Internet to get what is pertinent to your investmentsMon, 19 Nov 2018 22:00:55 +0000en-UShourly1Are you confident enough to buy low?https://www.adviceforinvestors.com/news/global-stocks/are-you-confident-enough-to-buy-low/
https://www.adviceforinvestors.com/news/global-stocks/are-you-confident-enough-to-buy-low/#commentsMon, 19 Nov 2018 20:00:13 +0000https://www.adviceforinvestors.com/?p=7199Stock market weakness provides you with an opportunity to buy at lower prices and higher yields. Buy low, sell high. Sounds simple, but can you do it? Here’s a high-quality power generation income trust that will pay you close to 7 per cent, plus, if you like to support the green movement in your investing,
]]>Stock market weakness provides you with an opportunity to buy at lower prices and higher yields. Buy low, sell high. Sounds simple, but can you do it? Here’s a high-quality power generation income trust that will pay you close to 7 per cent, plus, if you like to support the green movement in your investing, it’s a pure-play renewable power generator.

We think the October stock market sell-off presents you with a buying opportunity if you have money to invest and you won’t need it for at least the next five years. That’s because sell-offs give you a chance to buy high-quality stocks at lower prices.

And it’s also true if you’re an income investor. Lower prices, after all, translate into higher distribution and dividend yields. That means every new dollar you invest will generate more income than it did just a month ago, or even in mid-July when the S&P/TSX Composite Index reached an all-time high.

Take, for example, Brookfield Renewable Partners L.P. (TSX—BEP.UN). At its current price, Brookfield’s yield is approaching seven per cent. That’s a more generous payout than the 6.2 per cent it yielded in August, or the 5.4 per cent it yielded late last year.

Brookfield operates one of the world’s largest publicly-traded, pure-play renewable energy platforms. Its portfolio consists of hydroelectric, wind, solar and storage facilities in North and South America, Europe and Asia.

We expect increasing funds from operations, or FFO, to support a rise in Brookfield’s unit price over time. So far this year, FFO has continued to increase, but not as much as expected. For the six months ended June 30, 2018, Brookfield’s FFO was US$365 million (all figures in US dollars unless otherwise indicated), or $1.17 a unit, compared with $347 million, or $1.16 a unit, in the same period of 2017.

In the second quarter, however, FFO declined five per cent year over year to $172 million. This decrease was caused by lower generation at the company’s North American hydroelectric facilities due to weak hydrology, as Ontario and New York experienced lower rainfall.

But if the numbers are changed to reflect long-term average generation, normalized FFO would have risen just over 21 per cent to $206 million.

The long-term outlook for FFO growth is positive. Despite declines in subsidies, governments around the world continue to set higher renewable targets. This gives Brookfield opportunities to continue growing its operating capabilities and global business. For example, the company estimates that replacing the non-renewable capacity in its core markets with wind and solar will require over $10 trillion of investment. The opportunity to invest and grow its businesses, then, should be substantial for decades to come.

Brookfield Renewable Partners’ units yield close to 7 per cent. It’s a buy for growth and income.

This is an edited version of an article that was originally published for subscribers in the November 2, 2018, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

]]>https://www.adviceforinvestors.com/news/global-stocks/are-you-confident-enough-to-buy-low/feed/0A bond and 2 best stocks to buy nowhttps://www.adviceforinvestors.com/news/dividend-stocks/a-bond-and-2-best-stocks-to-buy-now/
https://www.adviceforinvestors.com/news/dividend-stocks/a-bond-and-2-best-stocks-to-buy-now/#commentsSun, 18 Nov 2018 20:00:37 +0000https://www.adviceforinvestors.com/?p=7193Guy Lapierre, a Port Coquitlam, BC-based vice president at PI Financial, really likes Calgary-based Parkland Fuel Corp.’s six per cent bonds and two stocks—BCE for its dividend yield and Transcontinental for a niche play opportunity, especially with the fast-approaching holiday season.
As everyone and their mother could tell you, marijuana is now legal in Canada. Even
]]>Guy Lapierre, a Port Coquitlam, BC-based vice president at PI Financial, really likes Calgary-based Parkland Fuel Corp.’s six per cent bonds and two stocks—BCE for its dividend yield and Transcontinental for a niche play opportunity, especially with the fast-approaching holiday season.

As everyone and their mother could tell you, marijuana is now legal in Canada. Even so, Vancouver-area portfolio manager Guy Lapierre says he is far from ready to invest heavily in it. “I’m looking at ’em horrified,” says Mr. Lapierre, a vice-president at PI Financial, of marijuana stocks.

“It’s a straight valuation. I still see 50 per cent reductions in the retail price of marijuana,” he elaborates. “The entire system seems poised to prove the adage, ‘Buy the rumour, sell the news.’”

The portfolio manager argues that the retail market is finite and has already been roughly priced out, analyzed, and otherwise quantified by financial experts. In turn, investors have driven current cannabis stock prices so high up that they already account for potential recreational earnings. Accordingly, he says: “I can’t buy a position significantly at the price I want.”

Mr. Lapierre asserts that assigning a value to marijuana as a product is similar to doing so for beer or wine: users have subjective preferences, but often, consumer choice ultimately boils down to price point.

At the same time, he says: “There’s existing competition and that’s going to have to shake itself out.” Canadian producers are quickly ramping up operations and expanding their cultivation infrastructure. Since the federal government is unlikely to establish a ‘marijuana board’ akin to the former Canadian Wheat Board or Canadian Dairy Commission that would control prices, competition in retail cannabis will be fierce and push prices below sustainable levels. He urges caution and avoiding any marijuana stock purchase larger than a small, affordable, retail investor-type stake.

By contrast, Mr. Lapierre expresses greater interest in medical marijuana’s growth potential, calling attention to CBD-based treatments in particular, though he points out that his confidence in CBD (cannabidiol) is based on anecdotal, personal experience.

Since marijuana-related clinical research projects are now legal, novel medical uses for CBD will emerge, he predicts. However, he adds that he does not expect such treatments to receive approval from the US Food and Drug Administration or its Canadian counterparts in the next five years because the research studies are still in their infancy.

Mr. Lapierre’s interest is more income

Asked about interest rates, Mr. Lapierre says he is preparing clients for a one-percentage-point increase between this year and the end of 2019.

To that end, the portfolio manager says he has purchased short-to-medium-term fixed-income investments of two to five years’ duration, mostly corporate bonds, with the intent of holding them to maturity. “We’re using asset allocation to protect our principal . . . and as a result we’re underperforming (more aggressive portfolios), in the short-term.” Among his conservative growth clients, for example, he has shifted asset allocations toward a 50-50 split between equities and fixed-income assets, when the split is usually closer to 70-30 in favour of equities.

Given domestic opposition to pipelines and energy expansion, Mr. Lapierre says: “Whether or not you can get a project approved is more important than costing right now.

“That leads me to look at a company like Parkland Fuel Corp. (TSX—PKI)”, he continues, particularly its bonds. Parkland bonds were issued with a six per cent coupon and are yielding 4.9 per cent until 2022 (they are currently priced at a premium), reflecting their major expansion via the acquisition of Chevron’s Canadian assets, including a refinery, last year.

2 best stocks to buy now

As for stocks, Mr. Lapierre names BCE Inc. (TSX—BCE; NYSE—BCE) as one of his ‘best buys’, on the basis of its 5.9 per cent dividend yield, which, combined with preferred tax treatment, is attractive even relative to Parkland’s yield, fully taxed, he says.

Transcontinental found a niche (bilingual packaging for Canadian consumers of foreign goods) and has worked to cheaply fill the need by purchasing pulp and paper-related assets and packaging suppliers.

When shipping containers unload those goods, they must be switched over to packages that follow Canadian requirements. According to Mr. Lapierre, an abundance of specialty items arriving for the holidays will come in Transcontinental containers.

In the month since Sept. 15 alone, the company’s shares dropped 17.1 per cent, resulting in an attractive buying opportunity, the portfolio manager says.

]]>https://www.adviceforinvestors.com/news/dividend-stocks/a-bond-and-2-best-stocks-to-buy-now/feed/0CIBC—a buy for growth and incomehttps://www.adviceforinvestors.com/news/financial-stocks/cibc-a-buy-for-growth-and-income/
https://www.adviceforinvestors.com/news/financial-stocks/cibc-a-buy-for-growth-and-income/#commentsThu, 15 Nov 2018 20:00:49 +0000https://www.adviceforinvestors.com/?p=7187CIBC performed above its peer group average this year, partly due to the results of its June, 2017 acquisition of CIBC Bank USA (formerly PrivateBancorp Inc.). But CIBC is still dominated by its Canadian business and may struggle to keep up with the other ‘Big Five’ Canadian banks’ growth rate over the next two years.
Canada’s
]]>CIBC performed above its peer group average this year, partly due to the results of its June, 2017 acquisition of CIBC Bank USA (formerly PrivateBancorp Inc.). But CIBC is still dominated by its Canadian business and may struggle to keep up with the other ‘Big Five’ Canadian banks’ growth rate over the next two years.

Canada’s big banks delivered solid results in their third quarter, with earnings per share (EPS) up an average 11 per cent year over year.

Canadian Imperial Bank of Commerce (TSX—CM) performed slightly better than this average, posting growth of 11.2 per cent. Revenue growth of nearly 11 per cent outpaced the peer group average of six per cent.

CIBC is a leading Canadian-based global financial institution. Through its four strategic business units—Canadian personal and small business banking, Canadian commercial banking and wealth management, US commercial banking and wealth management, and capital markets—the bank provides financial products and services to 11 million clients in Canada, the US and around the world.

The bank’s latest year-to-date results are very much like its third-quarter performance. For the nine months ended July 31, 2018, CIBC made $4.1 billion (adjusted), or $9.21 a share, compared with $3.4 billion, or $8.29 a share, in the same period of 2017.

Net interest income rose 15.6 per cent to $7.5 billion, partly due to the inclusion of the results of CIBC Bank USA (acquired in June 2017) for the full period. Other factors that contributed to the increase were volume growth and wider spreads between borrowing and lending rates across Canadian retail and commercial banking products, plus higher treasury revenue.

The big five Canadian banks, which have enjoyed strong EPS growth this fiscal year, are likely to see this growth fall by about half these next couple of years. CIBC, with its relatively large exposure to the Canadian consumer, may struggle to keep up with the other big banks over this time. Its EPS is expected to increase 2.9 per cent in fiscal 2019 and 5.4 per cent in 2020. Still, the bank is attractively valued at its current price.

The stock trades at just 9.7 times the $12.21 a share that CIBC will probably earn in fiscal 2018 (ended October 31). And the annual dividend of $5.44 a share, which was increased 2.3 per cent with the release of the third-quarter results, yields 4.6 per cent. CIBC is a buy for growth and income.

This is an edited version of an article that was originally published for subscribers in the October 2018/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

]]>https://www.adviceforinvestors.com/news/financial-stocks/cibc-a-buy-for-growth-and-income/feed/0The big five banks keep getting biggerhttps://www.adviceforinvestors.com/news/financial-stocks/the-big-five-banks-keep-getting-bigger-2/
https://www.adviceforinvestors.com/news/financial-stocks/the-big-five-banks-keep-getting-bigger-2/#commentsThu, 08 Nov 2018 20:00:05 +0000https://www.adviceforinvestors.com/?p=7167The big five Canadian banks are expected to earn more this year and next. They remain dividend aristocrats as they continue to raise their generous dividends. Despite getting better, the banks remain undervalued buys for share price gains and attractive income.
We’ve often pointed out that it pays to bet with the big five Canadian banks—not
]]>The big five Canadian banks are expected to earn more this year and next. They remain dividend aristocrats as they continue to raise their generous dividends. Despite getting better, the banks remain undervalued buys for share price gains and attractive income.

We’ve often pointed out that it pays to bet with the big five Canadian banks—not against them. That’s partly because they just keep on getting better. Their earnings per share regularly set new records. Their generous dividends go up every year. Despite their stellar record, the banks look cheaper than the overall market. As a self-made friend put it: “If I had bought only the banks and utilities, I would’ve been a millionaire a lot sooner.”

■ Bank of Montreal (TSX—BMO) is expected to earn $8.95 a share in fiscal 2018 (fiscal years end on Halloween). That would represent earnings growth of 8.9 per cent from $8.13 a share last year. Next year BMO’s earnings are expected to rise by another seven per cent, to $9.47 a share. These growing earnings enable the bank to raise its dividend each year. BMO yields an attractive 3.7 per cent.

■ Bank of Nova Scotia (TSX—BNS), or Scotiabank, is expected to earn $7.01 a share in fiscal 2018. That would deliver earnings growth of 7.2 per cent from $6.54 a share last year. Next year, Scotiabank’s earnings are expected to grow by 6.7 per cent, to $7.48 a share. It has just raised its dividend again, to $3.40 a share. Scotiabank yields a generous 4.5 per cent.

■ Canadian Imperial Bank of Commerce (TSX—CM), or CIBC, is expected to earn $11.97 a share this year. That works out to earnings growth of 7.7 per cent from $11.11 a share last year. Next year, its earnings are expected to climb by 5.3 per cent, to $12.60 a share. CIBC, too, has raised its dividend again, to $5.32 a share. That yields a generous 4.6 per cent.

■ Royal Bank of Canada (TSX—RY), or Royal, is expected to make $8.41 a share this year. That would represent rapid earnings growth of 11.1 per cent, from $7.57 a share last year. Next year, its earnings are expected to advance by 7.02 per cent, to nine dollars a share. Royal also increased its dividend, to $3.76 a share. This yields an appealing 3.7 per cent.

■ Toronto-Dominion Bank (TSX—TD), or TD, is expected to earn $6.35 a share. That works out to outstanding earnings growth of 14.6 per cent from $5.54 a share last year. In fiscal 2019, its earnings are expected to rise by 7.9 per cent, to $6.85 a share. TD pays a dividend of $2.68 a share. While it yields less than the others, a yield of 3.5 per cent is still attractive.

All of the big five banks are what’s known as ‘dividend aristocrats’. That’s because they have raised their dividends for more than five years in a row. We award all of the big five with our top quality rating of ‘Very Conservative’. As they diversify abroad and into new business lines, they become even safer.

Most outstanding stocks trade at high P/E (Price-to-Earnings) ratios. This can hurt shareholders even if the company does well—but less well than anticipated. The big five, by contrast, trade at low multiples: BMO at 11.8 times; Scotiabank, 10.9 times; CIBC, 9.7 times; Royal, 12.1 times; and TD at 12 times. This is well below the P/E ratio of 25.1 times for the S&P/TSX Composite index. Similarly, the big five trade at below-average Price-to-Book ratios and yield much more than the overall market.

A flatter yield curve makes long-term lending less profitable for the banks. Still, as interest rates have risen, they now charge more on assets such as mortgages. They pay little more on liabilities such as GICs (Guaranteed Investment Certificates). Also the diversified banks have ‘a finger in every pie’.

The banks are all solid blue chip stocks and remain a buy for further long-term share price gains plus generous, growing, dividends.

This is an edited version of an article that was originally published for subscribers in the September 7, 2018, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

]]>https://www.adviceforinvestors.com/news/financial-stocks/the-big-five-banks-keep-getting-bigger-2/feed/0A blue-chip, multi-sector stock to buyhttps://www.adviceforinvestors.com/news/tech-stocks/a-blue-chip-multi-sector-stock-to-buy/
https://www.adviceforinvestors.com/news/tech-stocks/a-blue-chip-multi-sector-stock-to-buy/#commentsSun, 04 Nov 2018 20:00:54 +0000https://www.adviceforinvestors.com/?p=7151Open Text has improved the quality of its revenues by increasing the amount of recurring revenues it earns. Higher-quality revenues should help it to continue to deliver the cash flows it needs to grow its business and pay higher dividends.
Open Text (TSX—OTEX), a blue-chip multi-sector stock, has transitioned itself to a recurring revenue business. In
]]>Open Text has improved the quality of its revenues by increasing the amount of recurring revenues it earns. Higher-quality revenues should help it to continue to deliver the cash flows it needs to grow its business and pay higher dividends.

Open Text (TSX—OTEX), a blue-chip multi-sector stock, has transitioned itself to a recurring revenue business. In fiscal 2018, which ended on June 30, the company’s annual recurring revenues, or ARR, crossed the $2-billion mark (all figures in US dollars unless otherwise noted). Management regards ARR as a key financial metric because higher recurring business improves the quality of its revenue profile.

In fiscal 2012, ARR made up 54.4 per cent of revenue. This latest fiscal year, that figure has increased to 73.2 per cent. And management is focused on increasing that figure even more.

Open Text is a market leader in enterprise information management software and solutions, enabling companies to manage, leverage, secure and gain insight into their enterprise information, on premises or in the cloud. The company’s vision is to help organizations use new technologies to unlock the power of information, become more intelligent and connected, and drive engagement with customers, partners, and employees.

The company increased its adjusted earnings by 32.0 per cent and its adjusted earnings per share by 26.7 per cent in the latest fiscal year. For the year ended June 30, 2018, Open Text made $683.6 million, or $2.56 a share, compared with $517.7 million, or $2.02 a share, in the same period of 2017.

Customer support contributes to growth

Revenues rose 22.9 per cent to $2.8 billion. Customer support revenues, which increased 25.6 per cent to $1.2 billion, contributed a large part to the overall growth. This growth, in turn, came mostly from Europe, the Middle East and Africa, as well as the Asia Pacific regions. Revenues in both these regions increased by more than 30 per cent.

Open Text’s adjusted EBITDA, meanwhile, rose 28.6 per cent to $1.0 billion. One reason for this is the company was able to limit the increase of its operating expenses to 15.5 per cent.

Open Text focuses on growth through acquisitions and organic activities. The company’s strong cash flows provide the fuel for acquisitions. Cash flow in fiscal 2018 was $824.8 million, up 45 per cent from $568.3 million in fiscal 2017. Free cash flow in the latest period was $573.8 million.

Free cash flow has given Open Text the flexibility to not only make acquisitions, but to reinvest in its business and grow organically. This the company seeks to do through innovation. It believes it can create sustained value through new innovation by expanding distribution and continually adding value to its existing customers. With this in mind, it has targeted about 11 to 13 per cent of its annual revenues on research and development this year.

We believe the long-term outlook for Open Text is positive. Its stock trades at just 13.1 times the company’s likely fiscal 2019 earnings of $2.72 a share. And its annual dividend of $0.61 a share, which was increased 15 per cent in fiscal 2018, yields 1.7 per cent.

Open Text is a blue chip stock to buy for growth and some income.

This is an edited version of an article that was originally published for subscribers in the October 19, 2018, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

]]>https://www.adviceforinvestors.com/news/tech-stocks/a-blue-chip-multi-sector-stock-to-buy/feed/02 tech stocks to buy for capital gainshttps://www.adviceforinvestors.com/news/us-stocks/2-tech-stocks-to-buy-for-capital-gains/
https://www.adviceforinvestors.com/news/us-stocks/2-tech-stocks-to-buy-for-capital-gains/#commentsWed, 31 Oct 2018 19:00:48 +0000https://www.adviceforinvestors.com/?p=7142The MoneyLetter recently took a look at two of the five so-called FAANG stocks (Facebook, Amazon, Apple, Netflix, and Alphabet’s Google) that have led the market higher in recent years. Apple and Netflix are both ‘buys’ for long-term share price gains and Apple is well on its way to becoming a dividend aristocrat.
Apple Inc. (NASDAQ—AAPL)
]]>The MoneyLetterrecently took a look at two of the five so-called FAANG stocks (Facebook, Amazon, Apple, Netflix, and Alphabet’s Google) that have led the market higher in recent years. Apple and Netflix are both ‘buys’ for long-term share price gains and Apple is well on its way to becoming a dividend aristocrat.

Apple Inc. (NASDAQ—AAPL) is one of the largest manufacturers of personal computers (such as the Macintosh), peripheral and consumer products. These include the iPod digital music player, the iPad tablet, the iPhone smartphone and the Apple Watch.

The company sells mostly to the business, creative, education, government and consumer markets. Apple also sells operating systems like iCloud storage and Apple Pay as well as a lot of digital content from the iTunes store and other portals.

In the year to Sept. 30, Apple is expected to earn US$11.76 a share. That would mark a 28 per cent jump from last year’s US$9.21 a share.

The forward-looking stock market, however, is focusing on the outlook for fiscal 2019. Apple’s earnings are expected to climb by 13.9 per cent, to US$13.40 a share. Based on this estimate, the shares trade at a P/E (Price-to-Earnings) ratio of 16.7 times. That’s reasonable for this highly profitable and diversified company. That’s likely why billionaire Warren Buffet bought it.

Apple began paying dividends in 2012 at US$0.38 a share. The company has raised its dividend each year since then, to US$2.92 a share today. Despite a 7.7-fold rise in the dividend, it yields a small 0.17 per cent. That’s because the shares have risen so much. In fact, that’s how Apple became the first US company to reach a market capitalization of US$1 trillion.

We expect Apple to continue to raise its dividend each year and eventually become a ‘dividend aristocrat’. In the US, this refers to companies that have raised their dividends for at least 25 consecutive years.

We also expect Apple to continue to repurchase its shares. After all, it generates more cash flow than it needs to fund its research and development and its capital investment.

It rewards its shareholders in two ways. Most important, the company raises its dividend every year. It also buys back its own shares. In fiscal 2012, Apple’s share count peaked at 6.575 billion. Since then, it has repurchased its shares every year. The share count is now down by over a quarter, to 4.915 billion.

Spreading the earnings over fewer shares raises Apple’s earnings per share, of course. All else being equal, this justifies a higher share price. Meanwhile, growing dividends attract income-seeking investors who can bid up Apple’s share price. It remains a buy for further long-term share price gains and modest, but growing dividends.

Buy Netflix for share price gains

Netflix Inc. (NASDAQ—NFLX) is the world’s largest Internet television network. At last count, it served 130.1 million streaming members in over 190 countries. Since June 30, the company also rents DVDs to its members in the US.

Netflix is growing quickly. In 2018, it’s expected to earn $2.67 a share. That’s more than double the $1.25 a share that it earned last year. Based on this year’s estimate, the stock trades at a high P/E (Price-to-Earnings) ratio of 133.2 times. The thing is, the forward-looking market’s focus is shifting to expectations about next year. In 2019, Netflix’s earnings are expected to jump by 60 per cent, to $4.27 a share. Based on this estimate, the stock trades at a better, but still-high, P/E ratio of 83.3 times.

Fast earnings growth can justify a higher P/E ratio. The trouble is, stocks can become what’s known as ‘priced for perfection’. That is, the market’s expectations become so high that it’s difficult for a stock to meet these expectations. If it does very well, but less well than the market expected, the share price can plunge. The stock market is, of course, erratic and unpredictable. It puts ‘fallen angels’ in the ‘doghouse’ for a while.

One positive aspect about Netflix is that it generates recurring and dependable cash flow. Subscribers around the world pay modest monthly fees for access to its offering of popular TV series and movies. This gives the company the money to continue to expand its business.

Competitors are springing up to try to eat some of Netflix’s lunch. These include Amazon.com, HBO and Hulu, among others. Analyst Robert Harrington wrote, “. . . new products are liable to threaten [Netflix] as well. Specifically, Disney’s impending launch of an ‘over-the-top’ product could pose a notable challenge. The House of Mouse is pulling its films and television shows from Netflix in anticipation of its proprietary product’s introduction.”

On the positive side, Netflix is producing more content of its own. For instance, it recently increased its 2018 programming spending from $8 billion to $13 billion. Netflix has won many Emmy nominations. This in-house production exclusively for its members can help Netflix compete against its rivals.

Netflix is a buy for long-term share price gains, if you need no dividends.

This is an edited version of an article that was originally published for subscribers in the October 2018/First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

]]>https://www.adviceforinvestors.com/news/us-stocks/2-tech-stocks-to-buy-for-capital-gains/feed/0Coca-Cola acquisition adds a caffeine buzzhttps://www.adviceforinvestors.com/news/us-stocks/coca-cola-acquisition-adds-a-caffeine-buzz/
https://www.adviceforinvestors.com/news/us-stocks/coca-cola-acquisition-adds-a-caffeine-buzz/#commentsTue, 30 Oct 2018 19:00:41 +0000https://www.adviceforinvestors.com/?p=7139The Coca-Cola Company, which long ago ceased using cocaine in its eponymously-named soft drink, is in decline. It’s now looking to caffeine to put a buzz back into its business by paying $5.1 billion to acquire the United Kingdom’s leading coffee chain, Costa Coffee.
If you are of a certain age, the very thought of an
]]>The Coca-Cola Company, which long ago ceased using cocaine in its eponymously-named soft drink, is in decline. It’s now looking to caffeine to put a buzz back into its business by paying $5.1 billion to acquire the United Kingdom’s leading coffee chain, Costa Coffee.

If you are of a certain age, the very thought of an American beverage giant seeking to resurrect its business growth with English coffee is mind-bendingly perplexing. But that was then, and this is now and Coca-Cola is is spending $5.1 billion for a ‘cuppa’ English coffee.

The incidence of obesity and diabetes has climbed around the world in recent years. Some believe that this reflects diets laden with sugar and a lack of physical activity. They see traditional soft drinks as part of the problem. As increasingly health-conscious consumers shift away from soft drinks, the world’s largest soft drink company has felt the impact in its results.

Coke’s sales peaked at $48.017 billion in 2012. They’ve fallen ever since. By 2017, the company’s sales had sagged by more than 26 per cent, to $35.410 billion. Its sales are expected to fall by more than 10 per cent in 2018, to $31.750 billion.

But The Coca-Cola Company (NYSE—KO) is adjusting to changing conditions and we’ve upgraded its shares to a buy for long-term share price gains as well as high and growing dividends.

Coke’s old soft drink business is declining

For a while, Coke bought back shares to raise its earnings per share. (Spreading the earnings over fewer shares increases the earnings per share, of course.) In fact, the company has repurchased shares every year since 2007. By 2017, it had reduced its share count by 377 million.

As sales and earnings declined, even share buybacks couldn’t offset the impact on Coke. Its earnings per share peaked at $2.08 a share in 2012. While the company has continued to raise its dividend each year, the payout ratio went up. Rising dividends become less secure as they account for a larger percentage of the declining earnings.

Coke writes: “Coffee is a significant and growing segment of the global beverage business.” Coke president and chief executive officer James Quincey said: “Hot beverages is one of the few segments of the total beverage landscape where Coca-Cola does not have a global brand.”

That’s why Coke has agreed to pay $5.1 billion to buy Costa Coffee from Whitbread PLC. [Mr. Quincey is a British businessman now living in the US. Maybe that helps explain Coca-Cola’s insight into the quality of English coffee in 21st century Britain.]

Costa currently operates nearly 4,000 retail outlets. These are mostly in the UK, where it’s “the leading coffee company”. Coke writes that Costa will give it “a strong coffee platform across parts of Europe, Asia Pacific, the Middle East and Africa, with the opportunity for additional expansion”. For instance, Costa has a “growing footprint in China, among other markets”. But Costa faces many competitors.

Starbucks Coffee and McDonald’s Corp. already have larger international markets. There are also well-entrenched regional players such as Tim Hortons in Canada and Dunkin’ Donuts in the US. Its likely that many of the markets that Costa covets are already served.

Costa is diversifying into other parts of the business. For instance, its retail outlets have “highly-trained baristas”. It also operates a coffee vending operation, a for-home coffee format and Costa’s “state-of-the-art roastery”. Costa Express sells “barista-quality coffee” in locations such as gas stations, movie theaters and travel hubs.

How Costa is doing financially

Coke expects to complete the acquisition of Costa Coffee in the first half of 2019. As a result, the transaction will not add anything to Coke’s results this year. But it will contribute in the year ahead.

Costa Coffee did well in fiscal 2018, which ended on March 1. Costa generated revenue of $1.7 billion. It also produced EBITDA of $312 million. (EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. Some investors use it to assess a company’s underlying profitability.)

Coke expected Costa to add to its earnings in the first full year. But only if you exclude one-time impacts for purchase accounting.

To its credit, Coke is responding to market shifts. We’ve upgraded it to a buy for long-term share price gains and growing dividends that yield 3.3 per cent.

This is an edited version of an article that was originally published for subscribers in the October 5, 2018, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

]]>https://www.adviceforinvestors.com/news/us-stocks/coca-cola-acquisition-adds-a-caffeine-buzz/feed/0Should you hold REITs while interest rates rise?https://www.adviceforinvestors.com/news/dividend-stocks/should-you-hold-reits-while-interest-rates-rise/
https://www.adviceforinvestors.com/news/dividend-stocks/should-you-hold-reits-while-interest-rates-rise/#commentsTue, 23 Oct 2018 19:00:14 +0000https://www.adviceforinvestors.com/?p=7112In a rising rate environment, apartment REITs are attractive because they have short-term leases which gives them greater flexibility to increase their lease rates. But you may already be too late to enjoy that party. However RioCan’s flagship in downtown Toronto highlights that REIT’s strategy to focus on mixed-use development in its major markets.
The S&P/TSX
]]>In a rising rate environment, apartment REITs are attractive because they have short-term leases which gives them greater flexibility to increase their lease rates. But you may already be too late to enjoy that party. However RioCan’s flagship in downtown Toronto highlights that REIT’s strategy to focus on mixed-use development in its major markets.

The S&P/TSX Real Estate Investment Trust (REIT) Index has outperformed the wider market by a large margin this year. Since the beginning of the year, the index is up 7.7 per cent. The S&P/TSX Composite Index, meanwhile, has struggled to get out of the red. It’s down 0.3 per cent over the same period.

The outperformance of REITs may seem counter-intuitive. After all, as interest-sensitive investments, they’re widely seen as a vulnerable to rising interest rates.

Yet the outperformance of REITs may not be as unusual as it seems. According to CIBC World Markets, there have been occasions in the past where the sector has outperformed in rising rate environments. What’s more important to them than the impact of rising rates on REITs is the strength of the economy. If the economy is doing well, REITs can benefit through rising funds from operations, even though servicing their debt may be more costly due to rising rates.

It’s not necessarily a good idea, therefore, to abandon your REITs when interest rates undergo a sustained rise. Instead, you may want to hold on to them, and even add to them on a selective basis, especially when their prices weaken.

Some argue that you may want to emphasize some REITs over others in the current environment. Apartment REITs, for example, are seen as attractive because they have shorter-term lease durations than other types of REITs. This gives them greater flexibility to increase their leases in a rising-rate environment.

As with many good-news stories, however, there’s a drawback, as investors have caught on to the idea and bid up the prices of these securities. Contrarians can find better value elsewhere.

RioCan focusing on its major markets

One such opportunity is RioCan Real Estate Investment Trust (TSX—REI.UN) which owns, manages, and develops retail-focused, increasingly mixed-use, properties located in prime, high-density, transit-oriented areas where, increasingly, Canadians want to live and work and shop.

RioCan has made progress on both its strategic dispositions and its development program. The REIT has surpassed the halfway mark of its $2.0-billion disposition target with $1.2 billion of secondary market assets sold or under firm or conditional contracts.

Meanwhile, it has made significant leasing progress at the office component of its new flagship development, ‘The Well’, in downtown Toronto—a retail, office and residential mix of over 3 million square feet.

For the six months ended June 30, 2018, RioCan’s funds from operations (FFO) were $294.5 million, or $0.92 a unit, compared with $289.4 million, or $0.88 a unit, in the same period of 2017. The increase occurred despite significant dispositions completed in the latest period and $4.3 million in one-time severance costs.

Same-property (properties owned and operated in both periods) net operating income (NOI) rose 2.3 per cent to $324.9 million. Same-property NOI for properties in Canada’s six major markets rose 2.8 per cent, while same-property NOI for secondary markets decreased 0.1 per cent.

RioCan expects continued organic growth over the short and long term as it continues to focus on its major markets, where it believes it can prosper despite a difficult retail environment.

RioCan trades around a reasonable 13.5 times its likely 2018 FFO of $1.84 a unit. Its annual distribution of $1.44 a unit yields about 5.8 per cent.

Buy for growth and income.

This is an edited version of an article that was originally published for subscribers in the October 5, 2018, issue of Money Reporter. You can profit from the award-winning advice subscribers receive regularly in Money Reporter.

]]>https://www.adviceforinvestors.com/news/dividend-stocks/should-you-hold-reits-while-interest-rates-rise/feed/0The big five banks keep getting biggerhttps://www.adviceforinvestors.com/news/financial-stocks/the-big-five-banks-keep-getting-bigger/
https://www.adviceforinvestors.com/news/financial-stocks/the-big-five-banks-keep-getting-bigger/#commentsThu, 18 Oct 2018 19:00:08 +0000https://www.adviceforinvestors.com/?p=7098The big five Canadian banks are expected to earn more this year and next. They remain dividend aristocrats as they continue to raise their generous dividends. Despite getting better, the banks remain undervalued buys for share price gains and attractive income.
We’ve often pointed out that it pays to bet with the big five Canadian banks—not
]]>The big five Canadian banks are expected to earn more this year and next. They remain dividend aristocrats as they continue to raise their generous dividends. Despite getting better, the banks remain undervalued buys for share price gains and attractive income.

We’ve often pointed out that it pays to bet with the big five Canadian banks—not against them. That’s partly because they just keep on getting better. Their earnings per share regularly set new records. Their generous dividends go up every year. Despite their stellar record, the banks look cheaper than the overall market. As a self-made friend put it: “If I had bought only the banks and utilities, I would’ve been a millionaire a lot sooner.”

■ Bank of Montreal (TSX—BMO) is expected to earn $8.95 a share in fiscal 2018 (fiscal years end on Halloween). That would represent earnings growth of 8.9 per cent from $8.13 a share last year. Next year BMO’s earnings are expected to rise by another seven per cent, to $9.47 a share. These growing earnings enable the bank to raise its dividend each year. BMO yields an attractive 3.7 per cent.

■ Bank of Nova Scotia (TSX—BNS), or Scotiabank, is expected to earn $7.01 a share in fiscal 2018. That would deliver earnings growth of 7.2 per cent from $6.54 a share last year. Next year, Scotiabank’s earnings are expected to grow by 6.7 per cent, to $7.48 a share. It has just raised its dividend again, to $3.40 a share. Scotiabank yields a generous 4.5 per cent.

■ Canadian Imperial Bank of Commerce (TSX—CM), or CIBC, is expected to earn $11.97 a share this year. That works out to earnings growth of 7.7 per cent from $11.11 a share last year. Next year, its earnings are expected to climb by 5.3 per cent, to $12.60 a share. CIBC, too, has raised its dividend again, to $5.32 a share. That yields a generous 4.6 per cent.

■ Royal Bank of Canada (TSX—RY), or Royal, is expected to make $8.41 a share this year. That would represent rapid earnings growth of 11.1 per cent, from $7.57 a share last year. Next year, its earnings are expected to advance by 7.02 per cent, to nine dollars a share. Royal also increased its dividend, to $3.76 a share. This yields an appealing 3.7 per cent.

■ Toronto-Dominion Bank (TSX—TD), or TD, is expected to earn $6.35 a share. That works out to outstanding earnings growth of 14.6 per cent from $5.54 a share last year. In fiscal 2019, its earnings are expected to rise by 7.9 per cent, to $6.85 a share. TD pays a dividend of $2.68 a share. While it yields less than the others, a yield of 3.5 per cent is still attractive.

All of the big five banks are what’s known as ‘dividend aristocrats’. That’s because they have raised their dividends for more than five years in a row. We award all of the big five with our top quality rating of ‘Very Conservative’. As they diversify abroad and into new business lines, they become even safer.

Most outstanding stocks trade at high P/E (Price-to-Earnings) ratios. This can hurt shareholders even if the company does well—but less well than anticipated. The big five, by contrast, trade at low multiples: BMO at 11.8 times; Scotiabank, 10.9 times; CIBC, 9.7 times; Royal, 12.1 times; and TD at 12 times. This is well below the P/E ratio of 25.1 times for the S&P/TSX Composite index. Similarly, the big five trade at below-average Price-to-Book ratios and yield much more than the overall market.

A flatter yield curve makes long-term lending less profitable for the banks. Still, as interest rates have risen, they now charge more on assets such as mortgages. They pay little more on liabilities such as GICs (Guaranteed Investment Certificates). Also the diversified banks have ‘a finger in every pie’.

The banks are all solid blue chip stocks and remain a buy for further long-term share price gains plus generous, growing, dividends.

This is an edited version of an article that was originally published for subscribers in the September 7, 2018, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

]]>https://www.adviceforinvestors.com/news/financial-stocks/the-big-five-banks-keep-getting-bigger/feed/0A tech stock and a financial stock to buyhttps://www.adviceforinvestors.com/news/us-stocks/a-tech-stock-and-a-financial-stock-to-buy-2/
https://www.adviceforinvestors.com/news/us-stocks/a-tech-stock-and-a-financial-stock-to-buy-2/#commentsMon, 01 Oct 2018 18:58:05 +0000https://www.adviceforinvestors.com/?p=7039Vancouver-based Elvis Picardo, a financial analyst and portfolio manager at HollisWealth, a division of Industrial Alliance Securities, picks one of Canada’s largest insurers and a US communications giant as the two best stocks for current buying.
While the markets have warmed up since last winter’s volatility, Vancouver financial analyst and portfolio manager Elvis Picardo points out
]]>Vancouver-based Elvis Picardo, a financial analyst and portfolio manager at HollisWealth, a division of Industrial Alliance Securities, picks one of Canada’s largest insurers and a US communications giant as the two best stocks for current buying.

While the markets have warmed up since last winter’s volatility, Vancouver financial analyst and portfolio manager Elvis Picardo points out that more trouble may be coming. “We last spoke in April and markets have taken a turn for the better since then,” says Mr. Picardo of HollisWealth, a division of Industrial Alliance Securities.

He had expressed concern then that North American Free Trade Agreement negotiations as well as the then-emerging trade war between the United States and China would dampen bullishness.

Instead, the S&P/TSX Composite Index reached a new high in mid-July. In the second quarter, it gained 5.9 per cent, its best quarterly performance in 4.5 years. The S&P 500 also traded at a six-month high in July and is up more than five per cent year-to-date.

The analyst says that south of the border, US corporate earnings helped to keep the price of shares up; north of it, a weaker Canadian dollar, along with strong commodity prices, especially for crude oil, bolstered the performance of the domestic stock market.

However, he adds: “In recent years, we’ve seen the biggest pullbacks in the months of August and September. We think it may be worthwhile to get a little defensive in terms of portfolio positioning.

“Our two picks are one of Canada’s largest insurers and a US communications giant,” says Mr. Picardo of his latest ‘best buys’, Manulife Financial Corp. (TSX—MFC; NYSE—MFC) and Verizon Inc. (NYSE—VZ).

Considerable potential for capital gains

Financial stock Manulife is a core holding in his clients’ portfolios, the analyst says. As of August, its shares were down by about 10 per cent year-to-date and 15 per cent compared to a nine-year high price of $27.77 per share in late January, making the current price an attractive one to buy at, he argues. He praises the international insurance company’s diversified business, growth drivers, and rising dividends.

The international insurance company reported core earnings of $1.3 billion in the first quarter of 2018, 22 per cent more than in the same period of 2017. Of those core earnings, Asian and US operations contributed 31 per cent each, Canadian operations made up 21 per cent, and Manulife’s global wealth and asset management arm generated the remaining 17 per cent.

“Household wealth in Asia is expected to double by 2025,” Mr. Picardo notes, while the aging North American population translates to a large inter-generational transfer of wealth in the years to come. Manulife predicts these trends will boost demand for its asset management, insurance, and retirement products.

Manulife management describes Asia and its wealth management segment as its long-term growth drivers. Core earnings in each segment rose 21 per cent and 24 per cent year-over-year, respectively, in the first three months of 2018.

The company also boasts one-year dividend growth of nine per cent and cumulative three-year dividend growth of 33 per cent, currently yielding 3.8 per cent.

Even so, the market has not embraced the company. Mr. Picardo explains “it’s been a slow and steady climb” since the global financial crisis and the recovery that followed.

Low interest rates, write-down risks from its legacy business, volatility in long-term bond yields, and a dearth of share buybacks have constrained its and other insurers’ shares.

On the upside, this has kept valuations attractive. Mr. Picardo says the consensus sets an average target share price of $29.12, implying considerable potential for capital gains.

Tech stock giant rolling out 5G

Verizon is one of the largest communication technology companies in the world. A major US wireless carrier, it is also a leader in 5G infrastructure, says Mr. Picardo, who began adding it to clients’ portfolios last October.

The company will launch 5G wireless data service in four markets in the second half of this year. The higher Internet speeds that the new technology enables will support the development of virtual reality, driver-less cars, and the Internet of Things, which should spur further 5G adoption, the analyst asserts.

Financially speaking, Verizon reported that its average revenue per user account rose for the first time in four years in 2018’s second quarter. Longtime pricing wars with competitors and the multibillion-dollar development of its 5G network ate into both the top and bottom lines.

Mr. Picardo says the company has stayed away from mergers and acquisitions even as competitors, such as AT&T Inc. and Time Warner Inc., have joined forces, but adds it may soon be searching for consolidation opportunities. “I think it’s kind of biding its time which kind of makes sense because valuations are very high right now.” The consensus assigns a US$56.5 target share price to Verizon. At present its dividend yield is about 4.5 per cent.